Gaps in board selection processes, oversight roles, say market watchers

Besides appointing new, more committed directors, Cityneon also appointed three independent directors. Tan says these directors have the skill sets compatible with the company’s growing interactive exhibition business. “We want people who have had exposure to growth companies,” he says.

Building a credible board is a subject few companies talk about. But recent events, including Keppel Corp’s bribery case and Singapore Post’s write-down of a US investment, have highlighted the importance of board oversight. Some market watchers tell The Edge Singa-pore that there are significant gaps in board selection processes and the roles of directors.

The Singapore Institute of Directors (SID) Survey 2017 shows that only 48% of Singapore boards of public-listed companies held a dedicated board strategy session in the last 12 months. Of those that said they held strategy meetings, more than half had only one such session. Those who did not hold such discussions said they left strategy planning to management.

“The board’s role is to provide leadership, set strategic objectives and formulate strategies. The fact that [some left it to management] suggests that the board does not recognise its key role in relation to strategy,” says Annabelle Yip, a partner at WongPartnership, at a panel discussion held to launch the results of the survey.

Released in November, the report was compiled by SID Directors, the Singapore Exchange and Singapore University of Social Sciences. It surveyed 203 companies, or 29.3% of the entire universe of locally listed companies. Sixty-eight per cent of the participants came from Mainboard-listed firms, 21% from Catalist-listed firms and 11% from real estate investment trusts.

The survey also found that nine out of 10 public companies elect board members through personal contacts, potentially restricting diversity within the board. Also, 81% of respondents do not impose hard restrictions on the tenure of independent directors.

Lack of diversity

While respondents in the SID survey agreed that diversity of expertise is crucial in appointing directors, risk management and compliance remain the primary focus. “Most boards in Singapore focus on [regulatory compliance], driven partly by legislative requirements, personal liability [of the directors] and reputational risk,” says Shai Ganu, Asean and South Asia managing director at corporate advisory firm Willis Towers Watson.

According to Ganu, most mid- to small-cap companies’ boards are made up of directors with expertise in three areas: legal, audit and business operations. Part of the reason might be that most companies in Asia are either founded or controlled by families. “[They] may directly or indirectly influence the selection of directors,” Ganu explains. “[The family members] may have grown up with [business] partners, allies [who may join their board].”

Ganu says, however, that good business leaders or partners do not necessarily make effective board members. “People should realise a good CEO does not necessarily make a good director,” he says. “The directors are representatives of shareholders, while management should be running the operation.”

Mak Yuen Teen, associate professor of accounting at the National University of Singapore’s (NUS) business school, says this method of recruiting directors would tend to underutilise the local talent available. “This is a big reason I don’t believe boards here generally are as effective. There are plenty of qualified people out there, but they are not being considered because of the use of personal networks for recruiting directors,” he says.

Management versus oversight

The boards of locally listed companies also tend to be dominated by directors with executive roles. “In a recent study, we found that 26% of boards have [at least half of their members comprised of] executive directors,” says Mak. Such boards are good at operations but less effective in providing oversight or strategic planning. SGX Listing Rules only mandate that one-third of the board must be made of independent directors.

Mak had previously raised concerns about Singapore Post’s board, highlighting the blurring of lines between management and the board. In a commentary published on Dec 15, 2015, he had questioned SingPost chairman Lim Ho Kee’s stepping up his “involvement to provide management with more time and guidance over and above the normal oversight of the role”. At the time, Lim was designated as an independent director and non-executive chairman.

In 2015, SingPost appointed Goh Yeow Tin as deputy chairman. Goh was to “oversee [SingPost’s] post-merger integration work, and the businesses and operations in Singapore”, according to SingPost’s announcement. Goh is also the lead independent director of VICOM and Sheng Siong Group, however, as well as an independent director at Lereno Bio-Chem and AsiaPhos.

“One must question whether Mr Goh has the necessary knowledge about the business, the experience and the time to undertake what sounds like a rather onerous task,” Mak had said then. Goh has since resigned from SingPost’s board.

Starting at the top

A great deal of the responsibility to drive an effective board lies with the chairman. “In Singa-pore, [based on our research,] some chairs behave as if they are an alternative CEO or maybe just the most important person in the organisation. And that is not a good chair,” says Stanislav Shekshnia, senior affiliate professor of entrepreneurship and family enterprise at INSEAD in Singapore.

The chairperson is supposed to help the board set the agenda and make a collective decision, he says. But the lines are blurred when the chairperson is also involved in management. For instance, some chairpersons also hold the role of CEO in the company. “Where the chair is the owner and CEO, as is the case in many family businesses [in Singapore], the relationship with management is very different, since decisionmaking power is concentrated in one person. In such companies, the board’s function is more to provide formal legitimacy vis-à-vis outside stakeholders, and less that of a truly independent body,” Shekshnia writes in a research report titled “Board Chairs’ Practices across Countries”.

Boards need to lead discussions on important issues, such as bribery, he adds. “Even though bribery and corruption are a key risk, especially for companies in certain sectors and countries, boards are often not engaged in discussing such risks.”

The chairperson also sets the tone for the board. Marleen Dieleman, associate professor at NUS, says: “More than half of the SGX-listed firms are [family-run], with majority shareholders often motivated by control and discretion. They appoint trusted directors and may discourage robust board discussions. The controlling family frequently holds both the CEO and chairman positions. This control-focus is a missed opportunity.”

Cityneon’s Tan says, however, that serving as both chairman and CEO is expedient for a fast-growing company like his. “We were able to execute the strategy at a faster pace, supported by the whole board. But at the end of the day, the decision was made by the board. The chairman does not decide for the board. It is like being the speaker of parliament,” he says.

Improving corporate governance

Do governance standards for companies and their directors need to be improved? Earlier this month, the Corporate Governance Council called for public feedback on a revised corporate governance code.

Under the newly proposed system, firms will be given more latitude to explain why they are not following the code. However, some elements that used to be in the code will be shifted to SGX’s Listing Rules. This means companies will be forced to comply with them. For instance, the listing rules would require a third of a company’s board to be made up of independent directors, and the definition of an independent director would change.

Irving Low, head of risk consulting at KPMG Singapore, says Singapore’s corporate governance requirements are already quite high. A KPMG survey of corporate governance requirements ranked Singapore third among Asian peers. Low says: “The survey looked at requirements, not how they were applied in practice, so it can’t be directly linked to effectiveness. However, it gives a sense of the standards expected in the different countries.”

Nevertheless, Low welcomes the revisions to the code. “The new corporate governance code will give added incentive for companies to address these issues as they review the tenure and independence of the board and crystallise their policies and processes around diversity,” he says. “The requirement for training of new directors will have the side effect of increasing the available pool of qualified candidates.”

Investors can also play their part. Ganu of Willis Towers Watson suggests the local market needs more shareholder activism. “It may not be proxy advisers like in the UK. It could be through [Securities Investors Association (Singapore)], SID or shareholder channels. There is room for shareholders to ask more questions of the board than [those related to whether the company complies with the corporate governance code],” he says.

This is particularly important, since boards are not held to the same standards as management. Underperforming management tends to be fired, while the consequences for boards are less pronounced. “Experience in Singapore shows that it is not easy to change board members,” says Ganu. “Where it has changed, I don’t think it has been through the right process. It is through the chairperson’s exerting his or her influence,” he says.

But activism is not commonplace among shareholders locally. “Singapore boards tend not to have enough interaction with shareholders. They are usually happy to have only limited contact at the annual general meeting. I was once on the board of a UK-listed entity with diverse shareholders, who insisted on meeting the chairman from time to time during the year,” says Mike Gray, an independent director on multiple corporate boards in Singapore.

Some investors have been quite vocal. One of them is David Smith, Aberdeen Standard Investments Asia-Pacific’s head of corporate governance. He once persuaded five other shareholders to come together to coax the management of a locally listed company to change its corporate governance standards. Voting at meetings at that time was done by a show of hands, and each shareholder got one vote regardless of the stake owned. Smith managed to talk management into a voting system based on stake sizes. The move helped Aberdeen escalate a board refresh.

“We want to see a bit more of a strategic challenge,” says Smith. “By that, I mean pushing management on capital allocation, strategy, and disruption and innovation. And it’s something we are spending a lot of time with companies on.”